Posts tagged tax planning
In 2012, Many Tax Benefits Increase Due to Inflation Adjustments
Oct 20th
IR-2011-104, Oct. 20, 2011, http://1.usa.gov/nPdoS7
WASHINGTON — For tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, the Internal Revenue Service announced today.
By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:
- The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.
- The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
- Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.
Credits, deductions, and related phase outs.
- For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
- The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.
- The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
- For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts; please see the table below.
| Medical Savings Accounts (MSAs) | Self-only coverage | Family coverage |
| Minimum annual deductible | $2,100 | $4,200 |
| Maximum annual deductible | $3,150 | $6,300 |
| Maximum annual out-of-pocket expenses | $4,200 | $7,650 |
The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.
Estate and GiftFor an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.
The annual exclusion for gifts remains at $13,000.
Other Items
- The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.
- Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household.
Details on these inflation adjustments can be found in Revenue Procedure 2011-52, which will be published in Internal Revenue Bulletin 2011-45 on November 7, 2011.
Health Care: Flexible Spending Arrangements & 2011 Changes
Oct 11th
IR-2010-95, Sept. 3, 2010, http://bit.ly/9olbku
WASHINGTON — The Internal Revenue Service issued guidance reflecting statutory changes regarding the use of certain tax-favored arrangements, such as flexible spending arrangements (FSAs), to pay for over-the-counter medicines and drugs.
The Affordable Care Act, enacted in March, established a new uniform standard that, effective Jan. 1, 2011, applies to FSAs and health reimbursement arrangements (HRAs). Under the new standard, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan.
A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).
Employers and employees should take these changes into account as they make health benefit decisions for 2011.
For details on current rules, see Publication 969 , Health Savings Accounts and Other Tax-Favored Health Plans.
Updates on this and other health care reform provisions can be found on the Affordable Care Act page on IRS.gov. Notice 2010-59 and Revenue Ruling 2010-23, posted today, further explains this change.
Related Item: Questions and Answers on Over-the-Counter Medicines and Drugs
You might also be interested in watching this YouTube video: Flexible Spending Arrangements, http://bit.ly/aPhEPy.
Six Tax-Efficient Ways to Pay for Back to School Items
Aug 30th
Students going back to school can utilize a variety of tax-favored ways to pay for college tuition, books, supplies, and computers. Here’s six ideas for paying for school expenses that have varying degrees of tax efficiency:
1. Take cash out of a 529 College Savings Plan. Distributions from a 529 plan are tax-free as long as the funds are used to pay for tuition, room and board, books, supplies, and computer equipment and software.
To read the rest of this article by William Perez, please go to http://bit.ly/aSiUuj.
Life Events Present Financial-Planning Opportunities
Jul 20th
In June, I discussed the myriad issues clients often overlook or ignore that require changes in their estate plans. That column mentioned key life events that may necessitate estate plan updates. I merely listed them because the implications for planning seemed obvious. But on further reflection, I realized that some changes, such as the birth of a new child, have implications that are not always obvious. Although parts may seem basic, the list contains good talking points for advisors and clients.
To read the entire article by Martin Shankman, an estate planner in Paramus, N.J., please go to http://bit.ly/dx7Hte.
4 Tips to Get the Most From Your Tax Planning
Jul 19th
I need to begin the article by explaining how many times I have heard a company’s tax adviser make a comment like this after the year is over for which they are preparing the taxes: “If only you would have talked to me last year we could have saved you some taxes.”
In addition to this reality, I have yet to see a business that faithfully and correctly engages in tax planning that does not save a significant amount of money—far in excess of any costs inherent to this planning.
Most entrepreneurs and business owners do not engage in tax planning in a meaningful and high-impact way. To help you overcome the barriers to completing this activity as well as to ensure it is effectively executed, here are four tips to implement to make your tax planning efforts fruitful:
To read the rest of this article by Ken Kaufman, Founder and CEO of CFOwise (R), please go to http://bit.ly/d6zWzB.
A Win-Win Tax Break: Buying Company Assets and Leasing Them Back to the Company
Apr 12th
Owners of a C corporation are sometimes hit with a double tax whammy. The corporation pays tax and the owner is taxed personally on dividends received from the company.
One potential tax break for both is to have the owner buy property and assets personally and then lease them to the company. By doing this, the owner is paid deductible lease payments instead of nondeductible dividends. The business owner’s income is offset with depreciation or amortization deductions.
The company benefits by gaining cash it may need for expansion. In addition, the business can deduct rental payments. Money paid to the owner in dividends is not deductible for the business.
There are five basic requirements for such a deal to satisfy the IRS that the transaction is legal.
Source: Small Business Strategies, March 2010
A Win-Win Tax Break: Buy Your Parents’ Home and Rent It Back
Apr 5th
Do you have older parents living in a house that has appreciated in value and who can no longer reap the tax breaks of homeownership? Consider buying their house and renting it back to them. All of you will benefit.
If your parents’ mortgage is paid off or if they are only making payments on principal, their tax bracket might be so low the mortgage interest deduction doesn’t matter. Chances are they don’t have enough deductions to beat the standard deduction amount and don’t itemize. Mortgage interest paid then is of no tax savings value to them.
In this situation, you and your parents will benefit from a sale/leaseback. By selling their home to you, your parents will gain cash without needing to refinance their home or get a home equity loan. And, by your leasing the house back to them, they don’t have to move. You, as the buyer and landlord, gain the tax benefits of owning rental property.
Make sure you pay a fair price for the house and support that price with a qualified and independent appraisal in order to avoid any gift-tax complications.
A word of warning: You can reduce the fair-market rent by 20% when renting to relatives. If you set the rent too low, the IRS can claim the rental home is for your personal use and limit the deductions as if the property were a vacation home.
Source: Small Business Tax Strategies, March 2010
Over-Taxed by Small Business Tax Requirements?
Feb 11th
It’s coming, looming closer and closer with each passing day. The dreaded tax filing season is in full swing, and, we’ll bet, it’s already giving a number of business owners more than their fair share of headaches.
As a small business, you’re already overwhelmed. You run your business, take care of your employees, manage your client relationships, and focus on your services or products. Where does keeping track of IRS changes for small business taxes fit into your schedule?
One of the major obstacles for small business owners is knowing and understanding tax law because of its ever-changing nature and the amount of time it takes to stay on top of it. Startups in particular experience quite the shock when the full scale of their tax requirements becomes clear.
In addition to the federal income tax, businesses also face various types of state and local taxes, including income, franchise and/or sales taxes. If they have employees, they must deal with payroll taxes – including payments and information filings to the government and their employees.
Many businesses also face specific excise taxes. Even the type of business entity you’ve chosen (sole proprietor, partnership, LLC) affects your taxes. Too often, small businesses overlook important details or misfile some of these tax responsibilities.
Some important reminders:
- Keep good records
- Plan for paying taxes throughout the year, set aside the funds you’ll need before they come due
- Make sure you classify your employees properly – classifying employees as contractors leads to trouble
- Follow the IRS guidelines carefully to avoid potential fines and penalties
There are many tools out there attempting to assist small business owners track required activities. The IRS publishes a small business tax calendar every year (here’s the link to the handy interactive copy of the tax calendar online). You can also subscribe to the tax calendar in your outlook calendar.
As a small business owner, you’re probably a do-it-yourselfer, after all, there’s lots of software packages available for tax filing. However, if maneuvering the gauntlet of allowable deductions and proper filing for maximizing your tax reductions is daunting, it might be smarter to focus on what you do best and hire a professional who specializes in small businesses to prepare your taxes. Especially as small business taxes are never one-time shots, a tax professional can keep track of the constant deadlines and requirements for you.
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